The truth about living on $2 a day

Caitlin Weaver is the Deputy Managing Director of the Financial Access Initiative.

Billions of people around the world live on less than $2 a day—an amount most of us could likely dig out of our couch cushions. It’s hard to imagine what it would be like to scrape by on so small an income, and easy to assume that it would be nearly impossible to put food on the table every day, much less save and plan for the future.

In 1999 Stuart Rutherford began research in Bangladesh that challenged this assumption. Rutherford met with families in villages and slums every two weeks over the course of a year and creating detailed “financial diaries” that tracked penny-by-penny how these families managed their money. Orlanda Ruthven and Daryl Collins replicated his approach in India and South Africa.

What Rutherford and others found is that poor families were managing to put food on the table, keep a roof over their heads, plan for medical emergencies, and even save for retirement. His work in Bangladesh, along with the financial diaries from India and South Africa, are featured in the new book Portfolios of the Poor: How the World’s Poor Live on $2 a Day. (Full disclosure: I work for the Financial Access Initiative, led by Jonathan Morduch who is one of the book’s co-authors.)

The stories and data from Portfolios of the Poor offer new thinking about how the world’s poorest communities manage their financial lives. The financial diaries show that the poor are not living hand-to-mouth, but that most of them save and borrow with an eye to the future, and maintain complex financial lives because they are poor, not in spite of it.

The households also demonstrate that being poor isn’t just about living on one or two dollars a day, but about dealing with the fact that these are just averages—on some days you have more and some days much less. Coping with the ups and downs is an overlooked but fundamental challenge for poor households. And above all, it becomes clear that the real tragedy of poverty is not just that the poor have limited resources, but that they lack the financial tools to squeeze all they can from what they have.

The researchers got to know Hamid and Khadeja, a Bangladeshi couple who are active money managers despite their limited income of $70 per month; Nomsa, an elderly South African woman who cares for her four grandchildren on a limited government stipend; and Sandeep from Delhi, an outgoing fellow who uses his huge acquaintanceship to develop a host of informal financial partnerships, borrowing from friends and neighbors.

While many of the households in Portfolios of the Poor use microfinance, the overall evidence from the book suggests that it’s time for new vision for the sector —one that includes microloans for a range of purposes beyond starting or investing in a business. A sample of the households who are customers of Grameen Bank divert half of their business loans to things like putting food on the table, paying down debt, and paying schools fees and medical expenses. The diaries also reveal how households create self-discipline devices (like rule-bound savings clubs) to protect their savings strategies in the face of temptation, an insight that aligns with new research at the overlap of psychology and economics.

Understanding how the poor manage their financial lives provides the foundation upon which to build policy agendas that meaningfully confront persistent inequalities. The insights gained from the financial diaries also provide a starting point for imagining new business models that serve those living on one or two dollars a day. Policymakers and financial institutions should take note: Portfolios of the Poor shows that the poor can and do use financial tools, and that they are willing to pay for them if they are well-designed and delivered.